**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                          |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                            |
| ** ** | ** ** | **For the  quarterly period ended September 30, 2005**                                                                                                                                                                                                     |
|       |       | ** **                                                                                                                                                                                                                                                      |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                      |
| ** ** | ** ** | **For the  transition period  from                  to                  .** |

 

**Commission File Number 000-31275**

 

**LARGE SCALE BIOLOGY CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **77-0154648**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. employer  identification number) |
|                                                            |       |                                     |
| **3333 Vaca Valley Parkway, Vacaville, CA 95688**               |
| (Address of principal executive offices and zip  code)          |
|                                                            |       |                                     |
| **(707) 446-5501**                                              |
| (Registrant’s telephone number, including area code)       |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes  ý   No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).   Yes  o   No  ý

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes   o   No  ý

 

The number of sharesoutstanding of registrant’s common stock, $0.001 par value, as of November 10,2005:  32,239,614

 

 

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**Large Scale Biology Corporation**

**Form 10-Q**

**For the Quarter Ended September 30, 2005**

**Table of Contents**

 
| PART I – FINANCIAL  INFORMATION |                                                                                                                               |   |
|-------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                      |                                                                                                                               |
|   Item 1.                            | Financial Statements                                                                                                               |   |
|                                      |                                                                                                                               |   |
|                                      | Condensed  Consolidated Balance Sheets as of September 30, 2005 and December 31,  2004 (Unaudited)                       |   |
|                                      |                                                                                                                               |   |
|                                      | Condensed  Consolidated Statements of Operations for the three and nine months ended September 30,  2005 and 2004 (Unaudited) |   |
|                                      |                                                                                                                               |   |
|                                      | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2005 and 2004 (Unaudited)           |   |
|                                      |                                                                                                                               |   |
|                                      | Notes to Condensed  Consolidated Financial Statements (Unaudited)                                                                  |   |
|                                      |                                                                                                                               |   |
|   Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        |   |
|                                      |                                                                                                                               |   |
|   Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                        |   |
|                                      |                                                                                                                               |   |
|   Item 4.                            | Controls and  Procedures                                                                                                           |   |
|                                      |                                                                                                                               |   |
| PART II  – OTHER INFORMATION    |                                                                                                                               |
|                                      |                                                                                                                               |   |
|   Item 2.                            | Unrestricted  Sales of Equity Securities and Use of Proceeds                                                                       |   |
|                                      |                                                                                                                               |   |
|   Item 6.                            | Exhibits                                                                                                                           |   |
|                                      |                                                                                                                               |   |
| SIGNATURE                                 |                                                                                                                               |
|                                           |                                                                                                                                    |        |  |  |

 

----

 

**PART I– FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements**

 

**Large Scale Biology Corporation**

**Condensed Consolidated BalanceSheets**

**(Unaudited)**

 
| ** **                                                                                                                                                                                           | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                                           | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Current assets:                                                                                                                                                                                      |       |                        |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                            |       | $                           | 85,000     |                       | $          | 1,112,000 |   |
| Accounts receivable, net                                                                                                                                                                             |       | 223,000                     |       | 133,000                    |       |
| Prepaid expenses                                                                                                                                                                                     |       | 533,000                     |       | 521,000                    |       |
| Total current assets                                                                                                                                                                                 |       | 841,000                     |       | 1,766,000                  |       |
| Property, plant,  and equipment, net                                                                                                                                                                 |       | 6,446,000                   |       | 7,798,000                  |       |
| Intangible  assets, net                                                                                                                                                                              |       | 1,745,000                   |       | 2,194,000                  |       |
| Other assets                                                                                                                                                                                         |       | 1,235,000                   |       | 1,037,000                  |       |
|                                                                                                                                                                                                 |       | $                           | 10,267,000 |                       | $          | 12,795,000 |   |
|                                                                                                                                                                                                 |       |                        |       |                       |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                        | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Current  liabilities:                                                                                                                                                                                |       |                        |       |                       |       |
| Accounts payable                                                                                                                                                                                     |       | $                           | 1,615,000  |                       | $          | 735,000 |   |
| Accrued employee compensation                                                                                                                                                                        |       | 466,000                     |       | 343,000                    |       |
| Accrued expenses                                                                                                                                                                                     |       | 109,000                     |       | 24,000                     |       |
| Current portion of debt                                                                                                                                                                              |       | 6,259,000                   |       | —                     |       |
| Deferred revenue and customer advances                                                                                                                                                               |       | 56,000                      |       | 28,000                     |       |
| Total current liabilities                                                                                                                                                                            |       | 8,505,000                   |       | 1,130,000                  |       |
| Long-term debt                                                                                                                                                                                       |       | —                      |       | 1,000,000                  |       |
| Accrued stock  compensation                                                                                                                                                                          |       | 452,000                     |       | 898,000                    |       |
| Deferred rent                                                                                                                                                                                        |       | 374,000                     |       | 336,000                    |       |
| Total liabilities                                                                                                                                                                                    |       | 9,331,000                   |       | 3,364,000                  |       |
| Stockholders’  equity:                                                                                                                                                                          |       |                        |       |                       |       |
| Common stock, par value $.001 per share; 60,000,000  shares authorized; 32,239,614 and 31,382,813 shares issued and outstanding at  September 30, 2005 and December 31, 2004, respectively |       | 204,152,000                 |       | 201,074,000                |       |
| Preferred stock, par value $.001 per share;  10,000,000 shares authorized; no shares issued and outstanding                                                                                          |       | —                      |       | —                     |       |
| Stockholders’ notes receivable                                                                                                                                                                  |       | (4,000                      | )          | (20,000                    | )          |
| Accumulated deficit                                                                                                                                                                                  |       | (203,212,000                | )          | (191,623,000               | )          |
| Total stockholders’ equity                                                                                                                                                                      |       | 936,000                     |       | 9,431,000                  |       |
|                                                                                                                                                                                                 |       | $                           | 10,267,000 |                       | $          | 12,795,000 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

1

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**Large Scale Biology Corporation**

**Condensed Consolidated Statementsof Operations**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                 |       | $                                          | 1,097,000  |                                      | $          | 523,000 |   | $ | 2,210,000 |   | $ | 1,204,000 |   |
| Costs and expenses:                                      |       |                                       |       |                                      |       |   |   |   |   |
| Development agreements                                   |       | 1,521,000                                  |       | 647,000                                   |       | 3,446,000 |   | 1,669,000 |   |
| Research and development                                 |       | 906,000                                    |       | 2,304,000                                 |       | 4,728,000 |   | 6,823,000 |   |
| General and administrative                               |       | 1,151,000                                  |       | 1,761,000                                 |       | 4,297,000 |   | 5,325,000 |   |
| Impairment of property                                   |       | 231,000                                    |       | —                                    |       | 231,000 |   | — |   |
| Total costs and expenses                                 |       | 3,809,000                                  |       | 4,712,000                                 |       | 12,702,000 |   | 13,817,000 |   |
| Loss from  operations                                    |       | (2,712,000                                 | )          | (4,189,000                                | )          | (10,492,000 | ) | (12,613,000 | ) |
| Interest income  (expense), net                          |       | (571,000                                   | )          | 18,000                                    |       | (1,097,000 | ) | 47,000 |   |
| Net loss                                                 |       | $                                          | (3,283,000 | )                                         | $          | (4,171,000 | ) | $ | (11,589,000 | ) | $ | (12,566,000 | ) |
| Net loss per  share - basic and diluted                  |       | $                                          | (0.10      | )                                         | $          | (0.13 | ) | $ | (0.37 | ) | $ | (0.42 | ) |
| Weighted average  shares outstanding - basic and diluted |       | 32,159,183                                 |       | 31,243,854                                |       | 31,691,747 |   | 29,921,779 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

2

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**Large Scale Biology Corporation**

**Condensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                                 | ** **  | **2004** | ** ** |
| Cash flows from  operating activities:                                       |       |                                     |        |   |   |
| Net loss                                                                     |       | $                                        | (11,589,000 | ) | $ | (12,566,000 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                     |        |   |   |
| Depreciation of property, plant and equipment                                |       | 1,146,000                                |        | 1,107,000 |   |
| Amortization of intangible assets                                            |       | 449,000                                  |        | 398,000 |   |
| Stock compensation expense                                                   |       | 569,000                                  |        | 749,000 |   |
| Vesting of warrant issued with debt and accretion of  interest               |       | 793,000                                  |        | — |   |
| Impairment of property                                                       |       | 231,000                                  |        | — |   |
| Loss on sale of equipment                                                    |       | —                                   |        | 18,000 |   |
| Loan forgiveness                                                             |       | 15,000                                   |        | — |   |
| Changes in assets and liabilities:                                           |       |                                     |        |   |   |
| Accounts receivable                                                          |       | (90,000                                  | )           | (35,000 | ) |
| Prepaid expenses                                                             |       | (12,000                                  | )           | (222,000 | ) |
| Other assets                                                                 |       | (198,000                                 | )           | (237,000 | ) |
| Accounts payable                                                             |       | 1,006,000                                |        | (53,000 | ) |
| Accrued employee compensation                                                |       | 123,000                                  |        | (481,000 | ) |
| Accrued expenses                                                             |       | 85,000                                   |        | 81,000 |   |
| Deferred revenue and customer advances                                       |       | 28,000                                   |        | (46,000 | ) |
| Deferred rent                                                                |       | 38,000                                   |        | — |   |
| Net cash used in operating activities                                        |       | (7,406,000                               | )           | (11,287,000 | ) |
| Cash flows from  investing activities:                                       |       |                                     |        |   |   |
| Proceeds from sale of assets                                                 |       | —                                   |        | 156,000 |   |
| Capital expenditures                                                         |       | (151,000                                 | )           | (434,000 | ) |
| Increase in patents and intellectual property  licenses                      |       | —                                   |        | (12,000 | ) |
| Net cash used in investing activities                                        |       | (151,000                                 | )           | (290,000 | ) |
| Cash flows from  financing activities:                                       |       |                                     |        |   |   |
| Proceeds from issuance of common stock                                       |       | 29,000                                   |        | 7,617,000 |   |
| Proceeds from issuance of debt and related warrants                          |       | 6,500,000                                |        | — |   |
| Proceeds from stockholder loan payments                                      |       | 1,000                                    |        | 4,000 |   |
| Change in restricted cash                                                    |       | —                                   |        | 144,000 |   |
| Principal payments on long-term debt                                         |       | —                                   |        | (39,000 | ) |
| Net cash provided by financing activities                                    |       | 6,530,000                                |        | 7,726,000 |   |
| Net decrease in  cash and cash equivalents                                   |       | (1,027,000                               | )           | (3,851,000 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 1,112,000                                |        | 7,737,000 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                        | 85,000      |   | $ | 3,886,000 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**Large Scale Biology Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

**1.**              The Company and Summary of Significant AccountingPolicies

 

LargeScale Biology Corporation and its subsidiaries (collectively, the “Company”, “we”or “our”) is a product-focused biotechnology company using proprietarytechnologies to develop and manufacture recombinant biologics.  Our biomanufacturing opportunities includevaccines, complex proteins and follow-on off-patent therapeutics.  We are focusing our efforts on the followingproducts:

 

•                  Certain follow-on off-patentbiologics and proprietary products, including Lysosomal acid lipase fortreatment of certain lipid storage disorders and reduction of plaque inarteries, Interferon alpha 2a and 2b, and Alpha-galactosidase A for treatmentof Fabry disease

 

•                  Recombinant Aprotinin, a proteaseinhibitor used in medical, research and manufacturing applications

 

•                  Vaccines for human and animalhealthcare, including antiviral and anticancer applications

 

Thetechnology employed in our product development and biomanufacturing operationsincludes our proprietary GENEWARE transient gene expression system and GRAMMRsystem to shuffle and improve gene sequences. Our manufacturing processes can be used to produce follow-on therapeuticproducts.  We believe that ourcombination of proprietary technologies and existing manufacturinginfrastructure enables us to rapidly and economically develop partner-specifiedproducts and to participate in market opportunities in major disease categories.

 

Ourwholly-owned subsidiary, Predictive Diagnostics, Inc. (“PDI”) is adiagnostics company established for the commercial development of a proprietaryapproach to early diagnosis of life-threatening diseases.  PDI’s products are supported by our technologydeveloped in the course of our past genomics and medical product developmentprograms.  PDI’s initial product focus isin the field of oncology.  Our BiomarkerAmplification Filter, or BAMF technology, potentially provides low-cost andrapid analysis of multiple biomarkers derived from profiling thousands ofindividual proteins, peptides and other metabolites found in clinical bloodsamples.  Current typical diagnostictests rely on measuring the variations from the normal amount of a singleprotein or biomarker.  Our BAMFtechnology finds multiple proteins or biomarkers in blood samples and creates adisease “fingerprint,” potentially leading to an accurate and early detectionof disease.

 

TheCompany’s proprietary systems are supported by patents and patentapplications.  The Company’s corporateoffices, research and development, and its subsidiary company, PredictiveDiagnostics, Inc. are headquartered in Vacaville, California.  The Company’s biomanufacturing operation islocated in Owensboro, Kentucky.

 

TheCompany incurred net losses of $11,589,000 and $17,425,000, and negativeoperating cash flows of $7,406,000 and $14,566,000 in the nine months ended September 30, 2005and the year ended December 31, 2004, respectively.  Thesenegative cash flows were financed primarily by proceeds from the Company’s IPOin 2000, a private placement of our common stock during the first quarter of2004 and loans received during December 2004 and the first nine months of2005.  The Company’s history of negativecash flows and its cash and cash equivalents balance of $85,000 at September 30, 2005raise substantial doubt about the Company’s ability to continue as a goingconcern.  The financial statements do notinclude any adjustments relating to the recoverability and classification ofassets or the amounts and classification of recorded liabilities that might benecessary should the Company be unable to continue as a going concern.  In an effort to mitigate this near-termconcern, the Company received $500,000 under a short-term secured loan on October 24,2005.  Under the terms of thatarrangement, the Company may receive up to an additional $1,000,000 in shortterm loans, subject to certain conditions (see Note 7).  Additionally, the Company entered into a$15,000,000 private equity agreement on August 5, 2005 (seeNote 5).  Regardless of the ultimateamount of proceeds received from these recent financings, the Companyanticipates that it will need to obtain additional sources of cash flows inorder to continue its operations.

 

4

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Priorto selling common stock under the private equity agreement, the Company mustfile a registration statement with the Securities and Exchange Commission (“SEC”)and this registration statement must become effective.  The private equity agreement is subject tofactors and restrictions that could limit the amount we receive under theprivate equity agreement including our stock price, trading volume that may beaffected by continued listing on the Nasdaq Capital Market, formerly known asthe Nasdaq SmallCap Market, and without stockholder approval, a maximum of6,429,828 issuable shares representing 19.99% of our total outstanding sharesat August 5, 2005.  We cannot assureyou as to the amount that we will receive under the private equity agreementbecause of uncertainties related to these and other factors andrestrictions.  We do not currently complywith the Nasdaq Marketplace Rules because the bid price of our commonstock has closed below the minimum $1.00 per share requirement for 30consecutive business days.  Our commonstock will continue to be listed on the Nasdaq Capital Market during this cure period,which ends on December 13, 2005.  Wewill seek to regain compliance within this cure period.

 

Inaddition, we are seeking to increase collaborative related cash flows byexpanding existing relationships based on product opportunities and to sellstock of our subsidiary, PDI, or other technology and fixed assets.  However, we cannot assure you that we willsuccessfully obtain funds through the sale of our stock, assets or PDI, orthrough product related revenues, as such events are subject to factors beyondour control.

 

*Basis ofPresentation* — The unaudited condensed consolidated financialstatements have been prepared by the Company in accordance with the rules andregulations of the Securities and Exchange Commission regarding interimfinancial information.  Accordingly,these financial statements and notes thereto do not include certain disclosuresnormally associated with financial statements prepared in accordance withaccounting principles generally accepted in the United States of America.  This interim financial information should beread in conjunction with the Company’s audited consolidated financialstatements and notes thereto for the year ended December 31, 2004 includedin the Company’s Annual Report on Form 10-K.

 

Theunaudited condensed consolidated financial statements include the accounts ofLarge Scale Biology Corporation and its subsidiaries.  All intercompany balances and transactionshave been eliminated.  In the opinion ofthe Company’s management, the unaudited condensed consolidated financialstatements include all adjustments (consisting of only normal recurring adjustments)and disclosures considered necessary for a fair presentation of the results ofthe interim periods presented.  Thisinterim financial information is not necessarily indicative of the results ofany future interim periods or for the Company’s full year ending December 31,2005.

 

*SegmentReporting* — The Company operates in one reportablesegment.

 

*IntangibleAssets* — The following table presents the carryingvalues and accumulated amortization of intangible assets as of September 30,2005:

 
| Capitalized patent costs        |   | $          | 1,852,000 |   |
|---------------------------------|--------|------------|-----------|--------|
| Intellectual  property licenses |   | 3,264,000  |      |
|                            |   | 5,116,000  |      |
| Accumulated  amortization       |   | (3,371,000 | )         |
|                            |   | $          | 1,745,000 |   |

 

*Stock-BasedCompensation* — The Company adopted Statement ofFinancial Accounting Standards No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation” effective January 1, 2003 for its stock-basedemployee compensation plans using the prospective recognition method underStatement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accountingfor Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS123.”  This method applies therecognition provisions of SFAS 123 to all employee stock awards granted,modified, or settled after January 1, 2003 and accordingly, recognizedcompensation expense for those issuances under our stock-based employeecompensation plans.  The fair values ofstock options were estimated at the date of grant using the Black-Scholesoption-pricing model and are being amortized over the vesting period ofgenerally 3 years.  For stock awardsgranted prior to January 1, 2003, compensation expense has not beenrecognized under SFAS 123, unless those stock awards were modified after January 1,2003.  During December 2004,Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS123R”), “Share Based Payment,” was issued requiring the expensing of allstock-based compensation.  The Company isevaluating the effects of SFAS 123R but believes its implementation will nothave a material effect on the Company’s financial statements since the Companyhad already adopted SFAS 123 for its stock-based employee compensation plans asdescribed above.

 

5

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Priorto January 1, 2003, the Company accounted for stock options granted toemployees and directors and other stock-based employee compensation plans usingthe intrinsic value method of accounting in accordance with AccountingPrinciples Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issuedto Employees” and related interpretations. As such, the Company recognized compensation expense for stock optionsonly if the quoted market value of the Company’s common stock exceeded theexercise price of the option on the grant date. Any compensation expense realized using this intrinsic value method isbeing amortized over the vesting period of the option.

 

Thefollowing table presents the effect on net loss and net loss per share if wehad always applied the fair value recognition provisions of SFAS 123 tostock-based awards to employees:

 
| ** **                                                                                                        | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                        | ** ** | **2005**                         | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss as  reported                                                                                             |       | $                                | (3,283,000 | )                               | $          | (4,171,000 | ) | $ | (11,589,000 | ) | $ | (12,566,000 | ) |
| Stock-based employee compensation expense included  in reported net loss for awards issued from 2003 through 2005 |       | 160,000                          |       | 307,000                         |       | 576,000 |   | 698,000 |   |
| Stock-based employee compensation expense determined  using the fair value method for all awards, net of tax      |       | (163,000                         | )          | (630,000                        | )          | (828,000 | ) | (1,749,000 | ) |
| Pro forma net  loss                                                                                               |       | $                                | (3,286,000 | )                               | $          | (4,494,000 | ) | $ | (11,841,000 | ) | $ | (13,617,000 | ) |
| Net loss per  share:                                                                                              |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted – as reported                                                                              |       | $                                | (0.10      | )                               | $          | (0.13 | ) | $ | (0.37 | ) | $ | (0.42 | ) |
| Basic and diluted – pro forma                                                                                |       | $                                | (0.10      | )                               | $          | (0.14 | ) | $ | (0.37 | ) | $ | (0.46 | ) |

 

Thefair values of stock options are estimated at the date of grant using theBlack-Scholes option-pricing model and amortized over the vesting period oftypically 3 or 4 years for the calculation of stock-based employee compensationin the above table.  The Company granted78,000 and 539,000 stock options to employees and directors during the ninemonths ended September 30, 2005 and 2004, respectively.

 

Stockoptions issued to non-employees as consideration for services provided to theCompany have been and continue to be accounted for under the fair value methodin accordance with SFAS 123, which requires that compensation expense berecognized for all such options.

 

*Net LossPer Share* — Basic net loss per share is computed by dividingthe net loss for the period by the weighted average number of common sharesoutstanding during the period.  Dilutednet loss per share is computed by dividing the net loss for the period by theweighted average number of common shares outstanding during the period, plusthe potential dilutive effect of common shares issuable upon exercise orconversion of outstanding stock options and warrants during the period.  The weighted average number of potentiallydilutive common shares were 104,807 and 309 for the three months ended September 30,2005 and 2004, respectively, and 243,434 and 551,484 for the nine months ended September 30,2005 and 2004, respectively.  Theseshares are excluded from diluted net loss per share because of theiranti-dilutive effect.

 

*Reclassifications* —Certain 2004 amounts have been reclassified to conform to the 2005presentation.

 

**2.**              Settlement with National Institute ofEnvironmental Health Sciences and Asset Impairment

 

The Company’s contractwith the National Institute of Environmental Health Sciences (“NIEHS”) wasterminated on December 31, 2003. The Company entered into a settlement agreement for reimbursement oftermination costs with NIEHS and received the settlement of $370,000 on August 17,2005.  Leasehold improvements inGermantown, Maryland were previously tested for impairment by comparing thecarrying value of leasehold improvements to expected future cash flowsincluding those from the NIEHS settlement. An impairment test resulted from the receipt of the NIEHS settlement asit was an event indicating that the carrying value of leasehold improvementsmay be impaired.  Leasehold improvementswere reduced by an impairment charge of $231,000 and the remaining net cost ofleasehold improvements of $641,000 will be expensed matching future income froma property sublease.

 

6

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**3.**              Debt

 

On December 17, 2004, the Company entered into a$2.9 million loan agreement, with an initial advance of $1.0 millionreceived on December 20, 2004, and a second advance of $1.9 millionreceived on January 14, 2005.  Inconnection with this loan agreement, the Company issued a common stock purchasewarrant to purchase a maximum of 700,000 shares of common stock at $1.42 pershare (see Note 5).  Borrowings under theloan bear interest at 8% and are secured by a first priority lien on theCompany’s assets located at its Owensboro, Kentucky facility including land,building and improvements; fixtures, machinery and equipment; and certainpatented intellectual property and related know-how used at the Owensborofacility.  The borrowed funds werepartially used to repay existing long-term debt and the use of such funds isrestricted to working capital and acquisition of machinery and equipment to beinstalled at the Owensboro facility.  Theloan contains certain representations and warranties and financial and othercovenants.  In addition, the Company issubject to covenants limiting transactions with affiliates, additionalindebtedness and leases, asset sales, and liens on properties.  The Company believes that it is in fullcompliance with these covenants.  Theprincipal balance under the loan is due on June 17, 2006 and interest isdue quarterly commencing on March 17, 2005.

 

On April 15,2005, the Company received $3,000,000 in cash in exchange for a promissory note(“Promissory Note”) and warrant (see Note 5) issued to Kevin J. Ryan, theCompany’s President and Chief Executive Officer and a member of the Company’sBoard of Directors (“CEO”).  ThePromissory Note bears interest at the prime rate plus two percent per annuminitially at 7.75% due monthly starting May 15, 2005 with a rate not lessthan 7.25%.  The Promissory Note is dueon April 17, 2006.  Borrowings underthe loan are secured by certain intellectual property related to PDI.  The Promissory Note may be prepaid by theCompany without penalty at any time.  OurCEO may elect to be repaid up to $1,500,000 as a result of any Companyfinancing event with net proceeds of $4,000,000 or more.  The fair value of the warrant was estimatedon April 15, 2005 assuming the purchase of the Company’s common stock,using the Black-Scholes option-pricing model with the followingweighted-average assumptions: expected volatility of 109%, risk-free interestrate of 4.2%, initial expected life of six years and no expected dividendyield.  The resulting fair value of$664,000 was recorded as equity and the remaining $2,336,000 was recorded asdebt.  The debt discount of $664,000 dueto the issuance of the warrant is accreted as interest over the loan periodusing a method approximating the effective interest method and resulted in$166,000 and $304,000 of interest expense being recorded during the three andnine months ended September 30, 2005, respectively, in the condensedconsolidated statements of operations.

 

On August 5, 2005, the Companyissued secured promissory notes (“Notes”) beneficially to Kevin J. Ryan, theCompany’s President and Chief Executive Officer and a member of the Board ofDirectors, and Robert L. Erwin, Chairman of the Board of Directors (“Investors”),and accompanying warrants (see Note 5), in exchange for loans to the Company inthe amounts of $750,000 and $250,000, respectively.  The Notes bear interest at the prime rateplus two percent per annum initially at 8.25% due monthly starting September 15,2005 with a rate not less than 7.25%. The Notes are due on January 31, 2006.  Borrowings under these loans are secured bythe Company’s real property located in Owensboro, Kentucky.  The Notes may be prepaid by the Company withoutpenalty at any time.  The Notes providethe Investors with the option to accelerate payment of the unpaid principalbalance upon certain financing transactions by the Company.  The fair value of the warrants were estimatedon August 5, 2005, using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions: expected volatility of 109%, risk-freeinterest rate of 4.3%, initial expected life of five and one-half years and noexpected dividend yield.  The resultingfair value of $414,000 was recorded as equity and the remaining $586,000 wasrecorded as debt.  The debt discount of$414,000 due to the issuance of the warrant will be accreted as interest overthe loan period using a method approximating the effective interest method andresulted in $133,000 of interest expense being recorded during the thirdquarter of 2005 in the condensed consolidated statements of operations.

 

Thecarrying value of debt as presented in the condensed consolidated balance sheetat September 30, 2005 is:

 
| ** **                              | ** ** | **Maturity Value** | ** ** | **Discounted Value** | ** ** |
|-----------------------------------------|------------|--------------------|------------|----------------------|------------|
| Note payable due  June 17, 2006    |       | $                  | 2,900,000  |                 | $          | 2,900,000 |   |
| Note payable due  April 17, 2006   |       | 3,000,000          |       | 2,640,000            |       |
| Note payable due  January 31, 2006 |       | 1,000,000          |       | 719,000              |       |
| Total debt                              |       | $                  | 6,900,000  |                 | $          | 6,259,000 |   |

 

7

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**4.**              Commitments

 

On August 5, 2005,the Company entered into a three-year private equity agreement with SouthridgeCapital Management LLC’s advised fund, Brittany Capital Management Limited,which permits the Company to require Brittany Capital to purchase up to$15,000,000 of the Company’s common stock (see Note 5).  The Company has a right to periodically putcommon shares to Brittany Capital for which it will pay the Company cash at aseven percent (7%) discount to the then market price calculated over a 10trading day period.  The agreementcommits the Company to put shares having a minimum aggregate purchase price of$2,000,000 and a maximum aggregate purchase price of $15,000,000 over the termof the agreement.  A fee of up to$140,000 is owed to Brittany if the total put shares have a value of less thanthe minimum aggregate purchase price. The Company must file a registration statement on SEC Form S-1 withrespect to the resale of the securities by Brittany Capital, and theregistration statement must be effective prior to the first put date.

 

**5.**              Stockholders’ Equity

 

***Common Stock***

 

***On August 5, 2005, the Company entered into athree-year private equity agreement with Southridge Capital Management LLC’sadvised fund, Brittany Capital Management Limited, that was amended andrestated on October 12, 2005, which permits the Company to requireBrittany Capital to purchase up to $15,000,000 of the Company’s commonstock.  The Company has a right to periodicallyput common shares to Brittany Capital for which it will pay the Company cash ata seven percent (7%) discount to the then market price calculated over a 10trading day period.  Each put transactionmust have a minimum purchase price of $25,000 and the number of shares issuableis limited to a maximum of five hundred percent (500%) of the weighted averagevolume for the twenty (20) trading days immediately preceding the put date, upto 4.99% of all of the Company’s outstanding common stock on a transactionclosing date.  The agreement commits theCompany to put shares having a minimum aggregate purchase price of $2,000,000and a maximum aggregate purchase price of $15,000,000 over the term of theagreement. A fee of up to $140,000 is owed to Brittany if the total put shareshave a value of less than the minimum aggregate purchase price.  The maximum aggregate number of shares put toBrittany Capital may not exceed 19.99% of the Company’s currently outstandingcommon stock, or approximately 6,430,000 shares, unless the Company obtainsstockholder approval.  The agreementterminates at the earlier of Brittany Capital having purchased the maximumnumber of shares allowed; the Company no longer maintains the listing of itscommon stock on a principal stock market; or three years.  The Company must file a registrationstatement with the SEC with respect to the resale of the securities by BrittanyCapital, and the registration statement must be effective prior to the firstput date.***

*** ***

On March 3,2005, the Company issued a $600,000 convertible promissory note (“Note”) toKevin J. Ryan, the Company’s President and Chief Executive Officer and a memberof the Company’s Board of Directors.  TheNote bears interest at 8% and is due on July 1, 2005.  The Note is convertible into common stock ofthe Company, at the option of the holder, on or before the due date, at aconversion price equal to the greater of the closing price of the Company’scommon stock on March 3, 2005, or 90% of the average of the closing pricesof Company’s common stock on the 22 trading days ending the day before theconversion of the Note.  The Note wasconverted into 631,579 shares of the Company’s common stock on June 29,2005 at a conversion price of $.95 per share according to the terms of theNote.

 

*Warrants*

 

TheCompany reserved 700,000 shares of common stock for issuance upon theexercise of a warrant granted on December 17, 2004, in connection with theCompany’s issuance of a promissory note under a loan agreement (see Note3).  The warrant is exercisable startingthe earlier of July 31, 2006 or 45 days following the prepayment of thepromissory note, and has an exercise price of $1.42 per share, subject toadjustments for stock splits, combinations, reclassifications and similarevents, and expire on December 17, 2011. The number of shares issuable under the warrant is to be determinedaccording to a formula based on the aggregate daily principal loan balance upto a maximum of 700,000 shares of the Company’s common stock.  Issuable under the warrant are 355,685 sharesof common stock as of September 30, 2005. The Company has granted the warrant holder certain registration rightswith respect to the shares issuable upon exercise of the warrant.  The fair value of the shares issuable underthis warrant was estimated with the initial advance of $1.0 million received onDecember 20, 2004, and $1.9 million received on January 14, 2005,using the Black-Scholes option-pricing model with the followingweighted-average assumptions: expected volatility of 118% and 109%,respectively, risk-free interest rate of 4.2% and 4.1%, respectively, initialexpected life of seven years and no expected dividend yield.  The resulting fair value is being amortizedover the loan period and resulted in $356,000 of interest expense beingrecorded during the first nine months of 2005 in the consolidated statements ofoperations.

 

8

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TheCompany reserved 903,614 shares of common stock for issuance upon theexercise of a warrant granted on April 15, 2005 in connection with theCompany’s issuance of a promissory note to our CEO (see Note 3).  The warrant may either be used to purchase903,614 shares of the Company’s common stock at $0.83 per share or common stockof the Company’s PDI subsidiary, and expires on April 15, 2011.  The PDI exercise price would be the lowestprice per share of the PDI stock in any PDI financing event of no less than$1,500,000.  The number of warrant shareswould be determined by dividing $3,000,000 by the PDI exercise price.  PDI common stock issuable pursuant to thewarrant would be subject to exchange and underwriter’s holding periodrestrictions, or “lock-ups”.  The fairvalue of the warrant was estimated on April 15, 2005 to be $664,000assuming the purchase of the Company’s common stock, using the Black-Scholesoption-pricing model with the following weighted-average assumptions: expectedvolatility of 109%, risk-free interest rate of 4.2%, initial expected life ofsix years and no expected dividend yield.

 

TheCompany reserved 617,284 shares of common stock for issuance upon theexercise of warrants granted on August 5, 2005 in connection with theCompany’s issuance of secured promissory notes to Investors (see Note 3).  The common stock purchase warrants may beexercised commencing on February 5, 2006 and expire on February 5,2011.  Mr. Ryan and Mr. Erwinmay purchase up to 462,963 and 154,321 shares, respectively, of the Company’scommon stock at  $0.81 per share, theclosing bid price of the Company’s common stock on August 4, 2005.  The Company’s stock issued to the Investorsupon exercise of their warrants is subject to piggyback registration rights ifthe Company should file certain registration statements with the SEC.  The fair value of the warrants were estimatedon August 5, 2005, using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions: expected volatility of 109%, risk-freeinterest rate of 4.3%, initial expected life of five and one-half years and noexpected dividend yield.  The resultingfair value of $414,000 was recorded as equity and the remaining $586,000 wasrecorded as debt.  The debt discount of$414,000 due to the issuance of the warrant will be accreted as interest overthe loan period using a method approximating the effective interest method.

 

**6.**              Supplemental Cash FlowDisclosures

 

On March 3,2005, the Company issued a convertible promissory note (“Note”) maturing on July 1,2005 to Kevin J. Ryan in exchange for $600,000. The conversion of the Note into 631,579 shares of the Company’s commonstock on June 29, 2005 resulted in debt decreasing and stockholder’sequity increasing by $600,000 as presented in the condensed consolidatedbalance sheet.

 

Approximately$15,000 of an employee loan that has been presented as stockholders notesreceivable in the condensed consolidated balance was forgiven by the Board ofDirectors in April 2005 and resulted in a non-cash charge to operatingactivities.

 

Includedin interest expense for the nine months ended September 30, 2005 wasnon-cash financing expense of $356,000 related to the vesting of a warrantissued with debt and $437,000 related to accretion of interest.

 

**7.**              Subsequent Events

 

On October 24, 2005,the Company received $500,000, the initial advance of up to four advances,under a $1,500,000 short-term secured loan agreement (the “Loan”) with AgilityCapital, LLC (“Agility”) and issued to Agility a ten-year warrant (the “Warrant”),entitling Agility to purchase up to 750,000 shares of the Company’s commonstock.  The second advance of up to$150,000 is available after Agility inspects and approves of the Company’sOwensboro, Kentucky facility.  The thirdadvance of up to $350,000 is available upon the opening of escrow for the sale(including sale and lease back) of certain assets of the Company or uponsigning a term sheet for an agreement covering the licensing of certain of theCompany’s technology to a third party unrelated to Agility.  Any proceeds received from a licensingagreement are to be first used to repay the third advance from Agility.  The fourth advance of up to $500,000 isavailable upon certain events involving the sale of certain assets.  All outstanding amounts are due and payableon December 31, 2005 (the “Maturity Date”).  If an escrow has been opened for the sale ofcertain assets of the Company and Agility has approved the terms of such sale,the Maturity Date will be extended until March 31, 2006 provided principalreduction payments of at least $100,000 or 15% of the outstanding obligationsare made on January 1, 2006, February 1, 2006 and March 1,2006.  Interest on the Loan is at 12%annually due on the first day of each month during the term of the Loan,commencing November 1, 2005.  TheLoan is secured by substantially all of the Company’s personal property assets;property, furniture and equipment; and intangibles and other assets.  Agility may accelerate payments owed underthe Loan including default fees and foreclose upon the assets securing the Loan,upon an event of default under the Loan. In addition, Agility is entitled to an exit fee of at least $450,000upon certain triggering events including an uncured event of default, sale,lease or license of substantially all of the Company’s assets and a liquidationof the Company.  The Company plans torepay this loan with proceeds from asset sales or receipts from collaborativearrangements.

 

9

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TheWarrant gives Agility the right to purchase shares of the Company’s commonstock numbering 500,000 shares on October 24, 2005, 50,000 additionalshares upon the second advance, 75,000 additional shares upon the thirdadvance, and 125,000 additional shares upon the fourth advance under theLoan.  The Warrant expires on December 31,2015.  The number of shares issued underthis Warrant may increase by an amount in excess of 1% of Company’s outstandingfully diluted stock upon an event of default under the Loan or failure toregister the shares of common stock to be issued under the Warrant.  The Warrant’s exercise price is the lower of$0.68 or the average closing price of the Company’s common stock for the thirtytrading days prior to the exercise date. The exercise price and the number of shares exercisable will be adjustedif the Company sells, issues or grants additional shares of its common stock orcommon stock equivalents at less than $0.68 per share.  Agility may elect to exercise the Warrantwithout cash consideration by reducing the number of shares received uponexercise.  The Company is required toregister the shares of common stock to be issued under the Warrant by filing a Form S-3registration statement on or prior to December 15, 2005 and shall causethe Form S-3 to be declared effective on or prior to February 1,2006.

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*Some ofthe statements contained in this report constitute forward-looking statementsthat involve substantial risks and uncertainties. In some cases, you canidentify these statements by forward-looking words such as “may,” “will,” “expect,”“plan,” “anticipate,” “believe,” “forecast,” “project,” or “continue” andvariations of these words or comparable words. In addition, any statementswhich refer to expectations, projections or other characterizations of futureevents or circumstances are forward-looking statements. Our Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontain many such forward-looking statements. These forward-looking statementsinvolve known and unknown risks, uncertainties and situations that may causeour or our industry’s actual results, level of activity, performance orachievements to be materially different from any future results, levels of activity,performance or achievements expressed or implied by these statements. The riskfactors contained in this report, under the heading Factors That May AffectOur Business, as well as any other cautionary language in this report, provideexamples of risks, uncertainties and events that may cause our actual resultsto differ from the expectations described or implied in our forward-lookingstatements.*

 

*Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements. You should not place undue reliance on theseforward-looking statements, which apply only as of the date of this report.Except as required by law, we do not undertake to update or revise anyforward-looking statement, whether as a result of new information, futureevents, or otherwise.*

 

*LargeScale Biology Corporation, LSBC, our logo,*GENEWAREÒ, BAMFTM,GRAMMRTM*and other product and trade names aretrademarks of or registered trademarks of Large Scale Biology Corporation inthe United States and/or other countries. Other product and trade namesmentioned herein may be trademarks and/or registered trademarks of theirrespective companies. References in this report to “the Company,” “our,” “we”and “us” refer collectively to Large Scale Biology Corporation, a Delawarecorporation, and its predecessors and subsidiaries.*

 

The following discussionof our financial condition and results of operations should be read inconjunction with our unaudited condensed consolidated financial statements andrelated notes included in this Report and our audited consolidated financialstatements and related notes for the year ended December 31, 2004 includedin our Annual Report on Form 10-K.

 

**Overview**

 

Ourcurrent efforts are to generate revenue and improve cash flows by developingand manufacturing products and entering into relationships to market and sellour products.  Management’s objective isto manufacture and sell products in order to generate sufficient cash flows tosustain our operations.  An example ofthese efforts is demonstrated by our lead candidate molecule, Lysosomal acidlipase, or LAL, which is a naturally occurring human enzyme for treatment ofcertain lipid storage disorders and reduction of plaque in arteries.  We have done extensive process developmentand we now have a scalable method of manufacturing LAL to pharmaceuticalspecifications and are currently evaluating the quality and stability of theproduct.  Our strategy is to develop LALfirst for certain smaller specialty markets that fall within the FDA’s OrphanDrug definition and subsequently move into larger, mainstream markets with anappropriate commercial partner.  On July 14,2005, we were awarded Orphan Drug Designation for our recombinant human LALfrom the FDA.  To expedite clinical andcommercial development of our product and to generate cash flow, we haveentered into a paid collaboration with Bayer BioScience N.V., a division of thecrop science unit within Bayer Holdings A.G., or Bayer BioScience.  We and Bayer BioScience have co-funded theinitial phases of the LAL program and we have met or exceeded all the programmilestones on time and within budget. The next step for Bayer BioScience is to commit to the clinicaldevelopment portion of the program, a decision that we anticipate them makingsometime this fall.

 

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Ourcash balance was $85,000 at September 30, 2005, and we have incurrednegative operating cash flows of $7,406,000 during the first nine months of2005 and $14,566,000 during the year ended December 31, 2004.  The current rate of cash usage raisessubstantial doubt about our ability to continue as a going concern.  The financial statements do not include anyadjustments relating to the recoverability and classification of assets or theamounts and classification of recorded liabilities that might be necessaryshould we be unable to continue as a going concern.  In an effort to mitigate this near-termconcern, on October 24, 2005 we received $500,000 under a short-termsecured loan, and on August 5, 2005 we secured $1,000,000 in short-termdebt financing and a private equity agreement under which we may put toinvestors up to $15,000,000 of our common stock.  Regardless of the ultimate amount of proceedsreceived from these recent financings, we anticipate that we will need toobtain additional sources of cash flows in order to continue our operations.

 

Theprivate equity agreement is subject to factors and restrictions that couldlimit the amount we receive under the private equity agreement including ourstock price, trading volume that may be affected by continued listing on theNasdaq Capital Market, and without stockholder approval, a maximum of 6,429,828issuable shares representing 19.99% of our total outstanding shares at August 5,2005.  We cannot assure you as to theamount that we will receive under the private equity agreement because ofuncertainties related to these and other factors.  In addition, we are seeking to increasecollaborative related cash flows by expanding existing relationships based onproduct opportunities and to sell stock of our subsidiary, PDI, or othertechnology and fixed assets.  However, wecannot assure you that we will successfully obtain funds through the sale ofPDI or assets, or product related revenues, as such events are subject tofactors beyond our control.

 

**Recent Developments**

 

Weapplied for and were subsequently granted Orphan Drug Designation from U.S. Foodand Drug Administration for our LAL therapeutic enzyme on July 14,2005.  We and Planet Biotechnology, Inc.,or Planet, expanded the companies’ biomanufacturing program to extract andpurify Planet’s lead product, CaroRx(TM), a plant-made antibody to controldental caries.  We entered into acollaboration and license agreement with BioCatalytics, Inc. to developimproved enzymes for chemical synthesis. The Company and Icon Genetics successfully completed the research phaseof the collaborative biopharmaceutical program and are now entering thecommercial phase of the collaboration. These agreements and developments do not represent immediate significantcash flows to us and we cannot assure you that they will result in futurerevenues to the Company.

 

The following financings have funded our operations during the firstnine months of 2005 and may provide additional funding subsequent to September 30,2005:

 

•                  We entered into a $2.9 millionloan agreement on December 17, 2004, with an initial advance of $1.0million received on December 20, 2004, and a second advance of$1.9 million received on January 14, 2005.  In connection with this loan agreement, weissued a common stock purchase warrant to purchase a maximum of 700,000 sharesof common stock at $1.42 per share.

 

•                  On March 3, 2005, we borrowed $0.6 million from Kevin J. Ryan, our President and ChiefExecutive Officer and a member of the our Board of Directors, or CEO, andissued him a convertible promissory note due on July 1, 2005.  Our CEO converted this promissory note into631,579 shares of common stock of the Company on June 29, 2005 at aconversion price of $.95 per share.

 

•                  We borrowed an additional $3.0 million from our CEO on April 15,2005, and issued him apromissory note due on April 17, 2006 and a common stock purchasewarrant.  The holder of the warrant hasthe option either to purchase 903,614 shares of our common stock at $0.83 pershare or common stock of our subsidiary, Predictive Diagnostics, Inc.

 

•                  The Company entered into a three-year privateequity agreement with Brittany Capital Management Limited on August 5,2005, which permits the Company to require Brittany Capital to purchase up to$15,000,000 of our common stock.  We havea right to periodically put common shares to Brittany Capital for which it willpay the Company cash at a seven percent (7%) discount to the then market pricecalculated over a 10 trading day period. We must file a registration statement on SEC Form S-1 with respectto the resale of the securities by Brittany Capital, and the registrationstatement must be effective prior to the first put date.  We expect an S-1 registration to be effectivewithin 60 days from October 12, 2005, subject to the SEC Staff’s review schedule.

 

•                  On August 5, 2005, we issued securedpromissory notes beneficially to our CEO and Robert L. Erwin, Chairman of theBoard of Directors, and accompanying warrants, in exchange for loans to theCompany in the amounts of $750,000 and $250,000, respectively.

 

•                  On October 24, 2005, we received$500,000, the under a short-term secured loan agreement with Agility and issuedto Agility a ten-year warrant, entitling Agility to purchase up to 750,000shares of our common stock.

 

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###### **Results of Operations**

 

*Revenues*—The following table presents the changes in revenues from 2004 to 2005:

 
| ** ** | ** ** | **Three Months ended September 30,** | ** ** | **Nine Months ended September 30,** | ** ** |
|------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** ** | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **Increase from 2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **Increase from 2004** | ** ** |
| Revenues   |       | $                                         | 1,097,000  |                                     | $          | 523,000 |   | $ | 574,000 |   | 110% |   | $ | 2,210,000 |   | $ | 1,204,000 |   | $ | 1,006,000 |   | 84% |   |
|            |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The revenue increase for the three andnine months ended September 30, 2005 is primarily attributed to thereceipt in the third quarter of 2005 of a $0.4 million settlement with the NationalInstitute of Environmental Health Sciences related to the termination of ourcontract with them on December 31, 2003 and new contracts with BayerBioScience that started in May 2005 and the US Army Medical ResearchInstitute of Infectious Diseases, or USAMRIID, that started in December 2004.  The contract with Bayer BioScience has notyet been extended as expected. Consequently, quarterly revenues in the fourth quarter are expected todecrease from those in the third quarter. If we are not able to increase revenues during 2005 and 2006 from newrevenue sources, or obtain additional financing, we will not be able to sustainoperations, as they presently exist.

 

*Developmentagreements*and*research and development**expenses* — The following tablepresents the changes in total researchactivity expenses from 2004 to 2005:

 
| ** **                | ** ** | **Three Months ended September 30,** | ** ** | **Nine Months ended September 30,** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **Increase (Decrease)  from 2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **Increase (Decrease)  from 2004** | ** ** |
| Development agreements    |       | $                                         | 1,521,000  |                                     | $          | 647,000 |   | $ | 874,000 |   | 135% |   | $ | 3,446,000 |   | $ | 1,669,000 |   | $ | 1,777,000 |   | 106% |   |
| Research and development  |       | 906,000                                   |       | 2,304,000                                |       | (1,398,000 | ) | (61)% |   | 4,728,000 |   | 6,823,000 |   | (2,095,000 | ) | (31)% |   |
| Total research activities |       | $                                         | 2,427,000  |                                     | $          | 2,951,000 |   | $ | (524,000 | ) | (18)% |   | $ | 8,174,000 |   | $ | 8,492,000 |   | $ | (318,000 | ) | (4)% |   |

 

Development agreements and research and developmentcosts consist mainly of personnel expenses, outside research services,research materials and laboratory overhead costs.*  Development agreement*expenses, as they relate to activities performed under revenue generatingresearch agreements and grants, have and are expected to fluctuate consistentlywith increases or decreases in revenues earned from research agreements andgrants.  The increase in developmentagreement expenses from 2004 to 2005 is primarily attributed to increasedefforts under new contracts with Bayer BioScience and USAMRIID, partiallyoffset by decreases under other revenue generating research agreements.  Developmentagreement expenses related to the Bayer BioScience and USAMRIIDcontracts were $0.9 million and $0.1 million during the three months ended September 30,2005, respectively, and $1.5 million and $0.4 million during the nine monthsended September 30, 2005, respectively. We expect development agreement expenses in the fourth quarter of 2005to decrease from the third quarter of 2005 because the Bayer BioSciencecontract has not yet been extended.  *Research and development* expenses from 2004 to 2005 havedecreased by $1.4 million and $2.1 million in the three and nine months ended September 30,respectively, as research personnel were reassigned to development agreementactivities.  We expect research anddevelopment expenses in the fourth quarter of 2005 to increase from the thirdquarter by the amount of any decrease in development agreement expenses.  Forthe three months ended September 30, the decrease in *total research activities* was primarilyattributed to a $0.3 million decrease in direct project expenses and a $0.2million decrease in salaries and benefits costs caused by attrition.  Forthe nine months ended September 30, the decrease in total researchactivities was primarily attributed to a $0.4 million decrease in directproject expenses, partially offset by other cost increases.

 

*Generaland administrative*— The following table presents the changesin general and administrative expenses from 2004 to 2005:

 
| ** **                 | ** ** | **Three Months ended September 30,** | ** ** | **Nine Months ended September 30,** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **(Decrease) from 2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease) from 2004** | ** ** |
| General and administrative |       | $                                         | 1,151,000  |                                     | $          | 1,761,000 |   | $ | (610,000 | ) | (35)% |   | $ | 4,297,000 |   | $ | 5,325,000 |   | $ | (1,028,000 | ) | (19)% |   |
|                            |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Forthe three months ended September 30, the decrease in general and administrativeexpenses was primarily attributed to a $0.5 million decrease in costs relatedto the Germantown, Maryland facility and a $0.1 million decrease in salariesand benefits costs caused by attrition. The Germantown, Maryland facility was closed in 2004.  Operating and clean-up expenses were onlyincurred during 2004 and facility rental expense in 2005 was offset by subleaserental receipts.  For the nine monthsended September 30, the decrease in general and administrative expenses isprimarily attributed to a $1.3 million decrease in costs related to theGermantown, Maryland facility and a $0.2 million decrease in salaries andbenefits costs, partially offset by $0.5 million increase in legal andaccounting costs related to patents, financings, and SEC and Nasdaq complianceactivities.

 

*Impairmentof property* —  Ourcontract with the National Institute of Environmental Health Sciences, orNIEHS, was terminated on December 31, 2003.  We entered into a settlement agreement forreimbursement of termination costs with NIEHS and received the settlement of$370,000 on August 17, 2005. Leasehold improvements in Germantown, Maryland were previously testedfor impairment by comparing the carrying value of leasehold improvements toexpected future cash flows including those from the NIEHS settlement.  An impairment test resulted from the receiptof the NIEHS settlement as it was an event indicating that the carrying valueof leasehold improvements may be impaired. Leasehold improvements were reduced by an impairment charge of $231,000.

 

*Interestincome and expense* — Interest income is not significantbecause of our declining cash and marketable securities balances available forinvestment.  Interest expense was notsignificant in 2004 because of the small amount of our long-term debt.  With the addition of debt of$2.9 million in December 2004 and January 2005,$0.6 million in March 2005, $3.0 million in April 2005 and$1.0 million in August 2005, interest expense increased substantially in2005.  Interest expense includes financecharges of $0.4 million and $0.8 million for the three and nine months ended September 30,2005, respectively, related to the accretion of a debt discount due to theissuance of a warrant and the vesting of another warrant issued in connectionwith debt.  We expect interest expense toincrease during the fourth quarter of 2005 due to the addition of debt on October 24,2005.

 

**Liquidityand Capital Resources**

 

Our history of negative cash flows and our cashbalance of $85,000 at September 30, 2005, raise substantial doubtabout our ability to continue as a going concern, absent any new sources ofsignificant cash flows.  In an effort tomitigate this near-term concern, on October 24, 2005 we received $500,000under a short-term secured loan, and on August 5, 2005 we secured$1,000,000 in short-term debt financing and a private equity agreement, underwhich we may put to investors up to $15,000,000 of our common stock.  Regardless of the ultimate amount of proceedsreceived from these recent financings, we anticipate that we will need toobtain additional sources of cash flows in order to continue our operations.

 

Theprivate equity agreement is subject to factors and restrictions that couldlimit the amount we receive under the private equity agreement including ourstock price, trading volume that may be affected by continued listing on theNasdaq Capital Market, and without stockholder approval, a maximum of 6,429,828issuable shares representing 19.99% of our total outstanding shares at August 5,2005.  We cannot assure you as to theamount that we will receive under the private equity agreement because ofuncertainties related to these and other factors and restrictions.  In addition, we are seeking to sell stock ofour subsidiary, PDI, or other technology and fixed assets, and to increasecollaboration-related cash flows by expanding existing relationships based onproduct opportunities.  However, wecannot assure you that we will successfully obtain funds through the sale ofassets or PDI, or product related revenues, as such events are subject tofactors beyond our control.

 

*Net cashused in operating activities* — The following table presentscash flows from operating activities for the first nine months of 2005 and2004:

 
| ** **                                  | ** ** | **Nine Months Ended September 30** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Cash paid to  employees                     |       | $                                       | (4,377,000 | ) | $ | (5,204,000 | ) |
| Cash paid to  suppliers                     |       | (4,873,000                              | )          | (7,253,000 | ) |
| Total cash paid  to employees and suppliers |       | (9,250,000                              | )          | (12,457,000 | ) |
| Cash received  from customers               |       | 2,148,000                               |       | 1,123,000 |   |
| Net interest  received (paid)               |       | (304,000                                | )          | 47,000 |   |
| Net cash used in  operating activities      |       | $                                       | (7,406,000 | ) | $ | (11,287,000 | ) |

 

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Thedecrease in *cash paid to employees*is the result of $0.5 million of severance benefits paid during the first ninemonths of 2004 to employees affected by our closure of our Germantown, Marylandfacility, decreased salaries andbenefits of $0.2 million attributed to attrition and $0.1 million deferral ofcash compensation by certain executives. The decrease in *cash paid tosuppliers* is primarily the result of sublease rental receipts of$0.6 million that offset rental expense and decreased cash expenditures of$0.4 million related to our Germantown, Maryland facility, decreasedresearch project cash expenditures of $0.4 million, and $1.1 millionof increased accounts payable and accrued expenses for the nine months ended September 30,2005.  These decreases in cashexpenditures were partially offset by increases in legal and accountingexpenditures.

 

Theincrease in cash received from customers is related to new contracts and the$0.4 million settlement from NIEHS.  Theinterest paid in 2005 is related to the increased debt load.  We expect the negative operating cash flowsin the fourth quarter of 2005 to be similar to those of the third quarter of2005.  If significant cash is receivedthrough financing or partnership events, operating cash payments will increaseas we reduce current liabilities.

 

*Net cashused in investing activities*— We spent $0.2 million oncapital expenditures during the first nine months of 2005.  We have no material capital expenditurecommitments at September 30, 2005. We anticipate that our biomanufacturing facility in Owensboro, Kentucky,may require capital expenditures to support our business objectives if we signrevenue-generating contracts.

 

*Net cashprovided by financing activities*— In 2000 we received netproceeds of $88.8 million from our initial public offering, whichsustained our operations through 2003. Financing activities have not provided significant cash flows from 2001through 2003.  In addition to the privateequity agreement and $0.5 million and $1.0 million short-term debt financingdescribed above, we have raised cash through the following transactions.

 

On March 8, 2004,we received net proceeds of approximately $7.5 million in a privateplacement of common stock.

 

On December 17,2004, we entered into a $2.9 million loan agreement, with an initialadvance of $1.0 million received on December 20, 2004, and a secondadvance of $1.9 million received on January 14, 2005.  Borrowings under the loan bear interest at 8%and are secured by our assets located at our Owensboro, Kentucky facility andcertain patented intellectual property and related know-how.

 

On March 3,2005, we issued a $600,000 convertible promissory note, or Note, to Kevin J.Ryan, our CEO.  The Note was convertedinto 631,579 shares of our common stock on June 29, 2005 at a conversionprice of $.95 per share according to the terms of the Note.

 

On April 15,2005, we received $3,000,000 in cash in exchange for a promissory note, orPromissory Note, and warrant issued to our CEO. The Promissory Note bears interest at the prime rate plus two percentper annum initially at 7.75% due monthly starting May 15, 2005 with a ratenot less than 7.25%.  The Promissory Noteis due on April 17, 2006. Borrowings under the loan are secured by certain intellectual propertyrelated to PDI.  The Promissory Note maybe prepaid by us without penalty at any time. Our CEO may elect to be repaid up to $1,500,000 as a result of any Companyfinancing event with net proceeds of $4,000,000 or more.  The warrant may either be used to purchase903,614 shares of our common stock at $0.83 per share or common stock of ourPDI subsidiary and expires on April 15, 2011.

 

###### **Critical Accounting Policies**

 

Weconsider the following accounting policies to be critical given they involveestimates and judgments made by management and are important for our investors’understanding of our operating results and financial condition.

 

*Long-LivedAssets* — Our long-lived assets include capitalized costs offiling patent applications, capitalized licenses and property andequipment.  We evaluate our long-livedassets for impairment in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” whenever events or changes incircumstances indicate that the carrying amount of such assets may not berecoverable.  Estimates of future cashflows and timing of events for evaluating long-lived assets for impairment arebased upon management’s judgment.  If anyof our intangible or long-lived assets are considered to be impaired, theamount of impairment to be recognized is the excess of the carrying amount overthe fair value of the assets.

 

Alllong-lived assets are amortized or depreciated over the shorter of theirestimated useful lives, the estimated period that the assets will generaterevenue, or the statutory or contractual term in the case of patents andintellectual property licenses. Estimates of useful lives and periods of expected revenue generation arereviewed periodically for appropriateness and are based upon management’sjudgment.

 

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*Stock-BasedCompensation*— We adopted Statement of Financial AccountingStandards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”effective January 1, 2003 for its stock-based employee compensation plansusing the prospective recognition method under Statement of FinancialAccounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-BasedCompensation-Transition and Disclosure, an amendment of SFAS 123.”  This method applies the recognitionprovisions of SFAS 123 to all employee stock awards granted, modified orsettled after January 1, 2003 and accordingly, recognized compensationexpense for those issuances under our stock-based employee compensation plans.  Methodologies used for calculations such asthe Black-Scholes option-pricing model and variables such as volatility andexpected life are based upon management’s judgment.  Such methodologies and variables are reviewedand updated periodically for appropriateness and affect the amount of recordedcharges.

 

DuringDecember 2004 Statement of Financial Accounting Standards No. 123(revised 2004) (“SFAS 123R”), “Share Based Payment,” was issued requiring theexpensing of all stock-based compensation. The Company is evaluating the effects of SFAS 123R but believes itsimplementation will not have a material effect on the Company’s financialstatements since the Company had already adopted FASB 123 for its stock-basedemployee compensation plans as described above.

 

**FactorsThat May Affect Our Business**

 

**RisksRelated to Our Business**

 

*TheCompany’s recurring losses from operations and current cash and cashequivalents balance raise substantial doubt about its ability to continue as agoing concern.*

 

Ourcash balance was $85,000 at September 30, 2005, and we have incurrednegative operating cash flows of $7,406,000 during the first nine months of2005 and $14,566,000 during the year ended December 31, 2004.  We have realized significant net losses inrecent years and in the nine months ended September 30, 2005.  Based upon our current cash balance, ourcurrent rate of negative operating cash flows and the expected cost to completethe development of our products, we cannot assure you that we will be able to continueas a going concern.  The financialstatements do not include any adjustments relating to the recoverability andclassification of assets or the amounts and classification of recordedliabilities that might be necessary should we be unable to continue as a goingconcern.

 

Our revenues were $2,210,000 for the nine months ended September 30,2005 and $1,767,000 for the year ended December 31, 2004.  We may be required to further reduce ouroperating costs by further restructuring our operations or reducing the scopeof our development programs.  Theseactions would adversely affect our ability to generate new sources ofrevenue.  If we are unable to obtainadditional sources of financing in addition to our agreements with Agility andBrittany, we will not be able to sustain our operations.

 

*Our productdevelopment programs need substantial additional funding to be commercializedand if we do not receive this funding, our business strategy may be delayed orabandoned*.

 

Our recombinant Aprotinin, Alpha-galactosidase A, Interferon alpha 2aand 2b and Lysosomal acid lipase require clinical trials to prove theirefficacy and safety for pharmaceutical applications.  We do not have sufficient working capital tocomplete all phases of clinical trials. Our PDI subsidiary requires funding for its start-up activities.  If we are unable to raise sufficientfinancing or collaborative funding, we may delay or abandon some of our productdevelopment initiatives, which would likely harm our business.

 

*Our workingcapital is not sufficient to fund our operations or all of our productdevelopment initiatives, and as a result, our business strategy may be delayedor abandoned.*

 

Werequire substantial working capital to continue our product developmentprograms and to fund our operations.  Inaddition, the risks inherent in developing innovative products or platforms,such as recombinant Aprotinin, Alpha-galactosidase A, Interferon alpha 2a and2b, Lysosomal acid lipase and BAMF technology diagnostic tests make itdifficult to forecast with certainty the capital required to commercialize ourproducts.  We may attempt to raise thiscapital through public or private equity financings or through collaborationsor strategic partnerships.  We cannotassure you that we will be able to obtain additional financing on commerciallyreasonable terms, if at all.  Our recentoperating results and our current stock price may limit our ability to raisecapital by selling and issuing additional equity securities.  If additional funds are raised through theissuance of equity securities or convertible debt securities, the percentageownership of our then-current stockholders would be reduced and the value oftheir investments might decline.  Inaddition, any new securities issued might have rights, preferences orprivileges senior to those securities held by our existing stockholders.  Certain of our assets are encumbered bysecurity interests that secure outstanding loans.  If we raise additional funds through theissuance of debt, we might become subject to restrictive covenants or highrates of interest, and our assets could become further encumbered, which wouldlimit our ability to borrow in the future. We may be unsuccessful in entering into any new collaboration orstrategic partnership that results in significant working capital orrevenue.  Further, any significantrevenues we generate from such collaborations or partnerships may not be

 

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realized for severalquarters or years, as regulatory approval and other matters could impedecommercialization of these products.  Ifwe are unable to raise sufficient additional capital, we may have to curtail orcease operations.

 

*Our stockcould be delisted from the Nasdaq Capital Market if it does not meet itscontinued listing requirements and as a result, our stock may lose itsliquidity.*

 

On June 16, 2005, August 24,2005 and September 6, 2005, we received notices from the staff of theNasdaq Stock Market (“Nasdaq”) that we do not comply with certain MarketplaceRules.  Specifically, the Nasdaq staffhas stated that we do not currently comply with Marketplace Rule 4310(c)(4) (the“Rule”), which is a requirement for continued listing on the Nasdaq CapitalMarket, because the bid price of our common stock has closed below the minimum$1.00 per share requirement for 30 consecutive business days.

 

Marketplace Rule 4310(c)(8)(D) provides,and Nasdaq has afforded, us a cure period of 180 calendar days to regaincompliance, which ends on December 13, 2005.  Our common stock will continue to be listedon the Nasdaq Capital Market during this cure period.  The Nasdaq staff has stated that if atanytime on or before December 13, 2005, the bid price of our common stockcloses at $1.00 per share or more for a minimum of 10 consecutive businessdays, the Nasdaq staff will provide written notification that we have achievedcompliance with the Rule, subject to the Nasdaq staff’s discretion to extendsuch 10 consecutive business day period under Marketplace Rule 4310(c)(8)(E).  The Nasdaq staff has stated that ifcompliance with the Rule cannot be demonstrated by December 13, 2005,the Nasdaq staff will determine whether we meet the Nasdaq Capital Marketinitial listing criteria as set forth in Marketplace Rule 4310(c), exceptfor the bid price requirement.  TheNasdaq staff has stated that if we meet the initial listing criteria, theNasdaq staff will notify us that we have been granted an additional 180calendar day compliance period.

 

We will seek to regaincompliance within this cure period.  Ourmanagement and board of directors are considering alternatives to addresscompliance with the continued listing standards of the Nasdaq Capital Market,which may include a reverse stock split.

 

*Holdersof common stock are subject to the risk of additional and substantial dilutionto their interests as a result of the issuances of common stock in connectionwith the private equity agreement.  Suchholders will experience increased dilution with decreases in the market valueof our common stock.*

 

Theshares issuable under the private equity agreement will be purchased at adiscount to the then-current market price, which will result in dilution uponissuance.  The lower the market price ofour common stock at the time we put shares, the more shares of common stock wewould be required to issue, if such shares are available for issuance,resulting in further dilution.

 

*We may not be able to enter into collaborations withpharmaceutical, biotechnology and other companies necessary to fully developand commercialize our products, which could result in substantial harm to ourability to derive revenue from future products.*

* *

We areindependently developing potential therapeutic and diagnostic products.  However, we expect to develop and commercializemost of our future products in collaboration with pharmaceutical, biotechnologyand other companies.  For example, ourstrategy concerning our recombinant Aprotinin, Alpha-galactosidase A,Interferon alpha 2a and 2b, Lysosomal acid lipase and BAMF technologydiagnostic tests involves seeking partners to complete the development andcommercialization of these products.  Wecannot assure you that such collaborative arrangements will be available to uson acceptable terms, or at all.  If ourcash flows continue to deteriorate or we take significant steps to reduce ourexpenses, potential partners may question our ability to perform and choose notto do business with us, which would make it harder for us to find a partner andwould harm our ability to commercialize our products.  Our success will depend in large part on ourability to enter into future collaborations with other companies for thefinancing of development and/or regulatory approval and commercialization ofour products.

 

*We may be dependent on ourcollaborators to develop and commercialize our products, which could result insubstantial harm to our ability to derive revenue from future products.*

 

Our reliance upon other companiesfor their development and commercialization capabilities will reduce ourcontrol over such activities and could make us dependent upon them.  Furthermore, obtaining funds througharrangements with collaborative partners or others may require us to relinquishour rights to certain technologies, product candidates or products that wewould otherwise seek to develop or commercialize on our own, or to sell orlicense our rights to certain products or technologies on terms that are worsethan we might have been able to obtain in a different environment.  To date, we have entered into only a limitednumber of collaborations.  Some of ourexisting agreements provide us with rights to participate financially in thecommercial development of products resulting from the use of our technologies.  We may be unable to obtain such rights infuture collaborations.  In addition,unforeseen delays or complications could arise and result in the breach of ourcontractual obligations with our collaborators and others, or us not being ableto perform at the quality and capacity levels required for success.

 

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*We may be unable to recruit and retain seniormanagement and other key scientific personnel on whom we are dependent, whichcould substantially harm our ability to generate future revenue.*

* *

Three members of our senior management terminated their employment withus during 2004 and the first six months of 2005.  The loss of a number of our senior managementor other key scientific personnel could significantly harm our business, causecollaborators to cease doing business with us, cause potential collaborators todecline to do business with us, or inhibit our research and development andcommercialization efforts.  None of ourkey personnel are subject to employment agreements that prevent them fromleaving our employment.  We facecompetition for research scientists and technical staff from other companies,academic institutions, government entities, nonprofit laboratories and otherorganizations.  We have implemented 10%cash salary reductions substituting non-cash stock compensation for our highestpaid employees to conserve cash.  Inaddition, we adhere to an eighteen-month salary review process for seniorpersonnel.  Our compensation practicesmay be less attractive compared to our competition.  Failure to recruit and retain seniormanagement and scientific personnel on acceptable terms may prevent us fromachieving our business objectives.

 

*We are inthe early or middle stages of product commercialization, and we may not be ableto successfully develop our products and technologies nor sustain commercialuse of our technology, which could harm our ability to generate future revenue.*

 

We are in the early or middle stages of commercializing our productsunder development, and we are subject to all of the risks inherent in thedevelopment of a business enterprise, including the need for substantialcapital to support the development of our products and technologies.  Our anticipated products most likely willrequire that we enter into new collaborations before we can manufacture and/ormarket them.  For instance, we believethat our NHL vaccine, which is ready for Phase II trials, cannot be furtherdeveloped without collaboration.  Theprospects for development of our Alpha-galactosidase A, recombinant Aprotinin,Interferon alpha 2a and 2b, and Lysosomal acid lipase products are limitedwithout collaboration or partnering support. Because we are in new and developing fields such as diagnostic tests fordisease, and our research focuses on new and unproven products, our therapeuticvaccines, proteins and other therapeutics under development may not beeffective for their intended purpose, or may not meet regulatory requirementsfor safety and efficacy.  In addition,even if we successfully develop a product, there may not be a substantialcommercial market for that product at commercially viable prices.

 

*We are innew and developing fields and there may not be a market for our technologies,which would harm our ability to generate future revenue.*

 

Our technologies, including our GENEWARE and BAMF technology, havelimited commercial precedent.  Much ofour research is fundamentally unique, and we cannot assure the acceptance ofits scientific merit or the benefits of products produced by it, nor that thepublic will react favorably to it.  Theusefulness of the information and products generated by our proteomics,functional genomics and bioinformatics technologies is unproven, and ourcollaborators and potential collaborators may determine that they are notuseful, cost-effective, or otherwise unacceptable to them.  We generate large amounts of data from ourresearch with genes and proteins and we may not be able to mine or integratethis data in a timely manner or turn it into commercially viable information.  In addition, because our fields arecharacterized by rapid innovation, we must complete development of ourtechnologies in time to meet market demand, if any.  If we fail to do so, it is likely that othertechnologies and companies will predominate and we will not be able to earn asufficient return on our investment.  Thefailure of our technologies to provide safe, effective, useful or commerciallyviable approaches to the discovery, development and/or production of drugtargets and proteins which can be used as therapeutics and diagnostic tests fordiseases, such as cancer, would significantly limit our business plan andfuture growth.

 

*Alternativetechnologies may supersede our technologies or make them noncompetitive, whichcould harm our ability to generate future revenue.*

 

Genomics, proteomics, biomanufacturing and bioinformatics are intenselycompetitive fields.  They arecharacterized by extensive research efforts, which result in rapidtechnological progress that can render existing technologies obsolete oreconomically noncompetitive.  If ourcompetitors succeed in developing more effective technologies or render ourtechnologies obsolete or noncompetitive, our business will suffer.  Many universities, public agencies andestablished pharmaceutical, biotechnology, health care, chemical and other lifesciences companies with substantially greater resources than we have aredeveloping and using technologies and are actively engaging in the developmentof products similar to or competitive with our products and technologies.  Like us, our competitors are using proteomicsand genomics technologies to identify potential drug targets, therapeuticproteins and diagnostic marker proteins. Our ability to invest in these technologies has been substantiallyimpaired as a result of lack of capital. To remain competitive, we must continue to invest in new technologiesand improve existing technologies.  Ifour revenues and cash flows do not improve significantly, we will not have theresources to continue such investment.

 

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Our competitors may devise faster, more complete or more accuratemethods to obtain proteomic and functional genomic information than ourtechnologies and systems, including our GENEWARE systems and BAMFtechnology.  There has been and continuesto be substantial academic and commercial research effort devoted to thedevelopment of such methods.  If successfulcompetitive methods were developed, it would undermine the commercial basis forthe products and technologies we intend to provide.

 

*General economic conditions may cause uncertainty with respect to othercompanies and entities collaborating with us or otherwise dealing with us, andthis can have an adverse effect on our revenues and cash flows*.

 

To a large extent, decisions by businesses and other entities tocollaborate or otherwise do business with us are discretionary, and thedecision making process typically takes many months to complete.  We believe that the previous slowdown in theU.S. and global economies, and the biotechnology and pharmaceutical industriesin particular, has caused potential collaborators and customers to deferdecisions to work with us or to access our technologies.  As a result, revenues and cash flows havebeen uncertain.  Future results aredifficult to predict, as it is difficult to accurately assess and predict thefuture demand for our products, technologies and services.  General economic conditions are expected toimprove as the economy grows.  However,we cannot assure you that any such improvement will cause our results ofoperations to improve.  If economicconditions decline or stagnate, our revenues and operating results could beadversely affected.

 

*Competitionwith our collaborators’ products, intellectual property disputes and otherconflicts with collaborators or licensees could harm our business.*

 

Conflicts with collaborators could have a negative impact on ourrelationships with them, and our revenues to be derived from these relationships,and impair our ability to enter into future collaborations, all of which couldadversely affect our business. Collaborators could develop competing products, preclude us fromentering into collaborations with their competitors or terminate their agreementswith us prematurely.  Moreover,disagreements could arise with collaborators or licensees over rights to ourintellectual property, our rights to share in any of the future revenues fromproducts or technologies resulting from use of our technologies, our rights topayments for achievement of milestones or our performance of research anddevelopment activities on behalf of collaborators, or our activities inseparate fields may conflict with other business plans of our collaborators orlicensees.

 

*We mustenter into agreements with third parties to provide sales and marketingservices, or develop these capabilities or we may not be able to successfullycommercialize our products and technologies*.

 

Although we plan to enter into sales and marketing arrangements withthird parties, we may not be able to enter into these arrangements on favorableterms, if at all.  We believe we mustalso expand our business development force with sufficient technical expertiseto generate demand for our products and technologies.  Without additional capital, we will not beable to expand our workforce.  Theinability to hire business development personnel or contract for effectivesales and marketing capabilities would significantly impair our ability tocommercialize our products and technologies.

 

*We may notbe able to successfully manufacture products in commercial quantities or atacceptable costs, which could greatly harm our ability to generate futurerevenue*.

 

Our biomanufacturing facility in Owensboro, Kentucky uses plant-basedmanufacturing methodology that has not been generally accepted by thepharmaceutical industry.  We do not havesufficient manufacturing experience on a variety of different products toconfidently predict costs and production capabilities on new productopportunities with accuracy. Accordingly, we may not be able to successfully manufacture products incommercial quantities or at acceptable costs.

 

*Ourexisting executive officers, directors and principal stockholders collectivelyown 22.1% of our outstanding stock, which might enable them to collectivelyinfluence significant corporate transactions that require stockholder approval*.

 

Our directors, our executive officers and principal stockholdersaffiliated with our directors and executive officers beneficially own, in theaggregate, approximately 22.1% of our outstanding common stock as of November 10, 2005.  The concentration of ownership in combinationwith other common stockholders may collectively influence significant corporatetransactions such as mergers, changes in control, consolidation or sale of someor all of our assets, and other significant corporate transactions requiringshareholder approval.

 

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*Ourstockholder rights plan and provisions of our charter documents and Delawarelaw may inhibit a takeover, which could adversely affect our stock price*.

 

We have adopted a stockholder rights plan and declared a dividenddistribution of one right for each outstanding share of common stock tostockholders of record as of May 4, 2001. Subject to certain specified exceptions and limitations under the rightsplan, we will continue to issue one right for each share of common stock thatbecomes outstanding after May 4, 2001. Each right entitles the holder to purchase one unit consisting of oneone-hundredth of a share of our Series A Junior Participating PreferredStock for $45 per unit.  Under certaincircumstances, if a person or group acquires 15% or more of our outstandingshares of common stock, holders of the rights (other than the person or groupcausing their exercisability) will be able to purchase, in exchange for the $45exercise price, shares of our common stock or of any company into which we aremerged having a value of $90.  Inaddition, the board of directors has the option, under certain circumstances,to exchange each right (other than rights held by the person or grouptriggering the board of directors’ option) for a share of common stock for noadditional consideration on the part of the holder of the right.  The rights expire on April 27,2011.  Our rights plan could make it moredifficult for a third party to acquire us (or a significant percentage of ouroutstanding capital stock) by causing substantial dilution of the stockownership of a person or group attempting to acquire control of us.  Our rights plan may have the effect ofdiscouraging takeover attempts because a potential acquirer would have tonegotiate with our board of directors to avoid suffering dilution.

 

Provisions in our charter and bylaws and applicable provisions of theDelaware General Corporation Law may also make it more difficult for a thirdparty to acquire control of us without the approval of our board of directors.  These provisions may make it more difficultor expensive for a third party to acquire a majority of our common stock ordelay, prevent or deter a merger, acquisition, tender offer or proxy contest,which may adversely affect our stock price.

 

**RisksRelated to Our Industry**

 

*Ifcompanies in the pharmaceutical, biotechnology, healthcare, and life sciencesindustries do not succeed or their demand for our products and technologiesdecreases, then our revenues could be reduced.*

 

We expect to derive our revenues primarily from products and technologiesprovided to the pharmaceutical, biotechnology, healthcare and life sciencesindustries.  Accordingly, our successwill depend directly on the success of companies in these industries and theirdemand for our products, services and technologies.  Our operating results may fluctuatesubstantially due to reductions and delays in expenditures by companies inthose industries, or their unwillingness or inability to use our products andtechnologies.  These reductions anddelays may result from factors that are not within our control, such as:

 

•                  changes ineconomic conditions generally;

•                  the extentto which companies in these industries conduct research and developmentinvolving diagnostics, proteomics and functional genomics in-house or throughindustry consortia;

•                  the extentto which genomic information is or is not made publicly available;

•                  consolidationwithin one or more of these industries;

•                  changes inthe regulatory environment affecting these industries;

•                  pricingpressures;

•                  market-drivenpressures on companies to consolidate and reduce costs; and/or

•                  otherfactors affecting spending in these industries.

 

*If competitive products are better than our products, then our businessmay fail.*

 

Our human and veterinary therapeutics and vaccines are included in thehighly competitive markets for protein development and production.  We face significant competition in ourprotein product development and production efforts from entities usingalternative, and in some cases, higher volume and larger scale, approaches forthe same purpose.  Competitors withsubstantially greater resources are actively developing products similar to orcompetitive with our products and potential products.  Our competitors may succeed in developingproducts or obtaining regulatory approval before we do or in developingproducts that are more effective than those we develop or propose todevelop.  A large number of universitiesand other not-for-profit institutions, many of which are funded by the U.S. andforeign governments, are also conducting research to discover genes and theirfunctions.  Any one or more of theseentities may discover and establish a patent position in one or more of thegenes or proteins that we wish to commercialize.

 

Several pharmaceutical, biotechnology, chemical and other life sciencescompanies engage in research and development in the use of unique geneexpression systems to produce therapeutic proteins.  These competitors may develop productsearlier or obtain regulatory approvals faster than we may be able to, ordevelop products that are more effective than ours.  New developments are expected to continue,and discoveries by others may render our products and technologiesnoncompetitive, which could lead to the failure of our business.

 

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Diagnostics companies in the health care industry with more resourcesthan us constitute varied competition for our diagnostic technology, which isearly stage.  Competing diagnostictechnologies may be developed and marketed that may be competitively superiorto ours.

 

*Our collaborators and we may not obtain FDA and other approvals for ourproducts in a timely manner, or at all.*

 

Drugs and certain diagnostic products and tests are subject to anextensive and uncertain regulatory approval process by the FDA and comparableagencies in other countries.  Theregulation of new products and certain diagnostic products and tests isextensive, and the required process of laboratory testing and human studies islengthy, expensive and uncertain.  Theburden of these regulations will fall on us to the extent we are developingproprietary products.  We may not be ableto obtain the clearances and approvals necessary for the clinical testing,field-testing, manufacturing or marketing of our products.  If the products or diagnostic tests are theresult of a collaborative effort, these burdens may fall on our collaboratorsor we may share these burdens with them. We may not obtain FDA or other approvals for those products or tests ina timely manner, or at all.  We mayencounter significant delays or excessive costs in our efforts to securenecessary approvals or licenses.  Even ifwe obtain FDA regulatory approvals, the FDA extensively regulates manufacturing,labeling, marketing, promotion and advertising after product approval.  Further, once a manufacturer obtainsregulatory approval, a marketed product and its manufacturer are subject tocontinual review, and discovery of previously unknown problems with a product,test or manufacturer may result in restrictions on the product, test,manufacturer or manufacturing facility, including withdrawal of the product ortest from the market.  In some countries,regulatory agencies also set or approve the sale prices for drug and diagnosticproducts and tests.  Additionally,several of our product development areas may involve relatively new technologythat has not been the subject of extensive product testing in humans.  The regulatory requirements governing thesedrug and diagnostic products, tests, and related clinical procedures remainuncertain and the products and tests themselves may be subject to substantialreview by the FDA and foreign governmental regulatory authorities that couldprevent or delay approval.  Regulatoryrequirements ultimately imposed on our products could limit our ability totest, manufacture and commercialize our products and tests.

 

*USDA rules couldadversely affect us or our collaborators, which could substantially harm ourability to generate future revenue.*

 

We must comply with USDA regulations for outdoor releases ofgenetically engineered organisms as well as other products designed for use onor with agricultural products.  Inaddition, the USDA prohibits growing and transporting genetically modifiedplants except pursuant to an exemption or under special permits.  We may use genetically modified plants asscreening or production hosts.  Changesin USDA policy regarding the movement or field release of genetically modifiedplant hosts could adversely affect our business by increasing the cost of ourproducts and technologies or decreasing consumer demand for those products andtechnologies or causing the government to prohibit their sale or use.  If we fail to comply with such rules orpolicies, we may be subject to financial loss or be liable for costs incurredas a result of non-compliance.

 

*If there isnegative public reaction to the use of genetically engineered products andtechnologies, then the market for certain products and technologies we developwill be adversely affected.*

 

Future commercial success of some of our products and of the productsof some of our collaborators will depend in part on public acceptance of theuse of genetically engineered products including drugs, plants and plantproducts.  Claims that geneticallyengineered products are unsafe for consumption or pose a danger to theenvironment may influence public attitudes. Negative public reaction to genetically modified organisms and productscould result in greater government regulation of genetic research and resultantproducts, including stricter labeling requirements, and could cause a decreasein the demand for our products, even if such products do not result from GMOorganisms.

 

*We may besued for product liability and our product liability insurance may not beadequate.*

 

The testing, marketing and sale of our and our collaborators’ productsand diagnostic tests will entail a risk of allegations of product liability,and third parties may assert substantial product liability claims againstus.  While we have limited productliability insurance to protect against this risk, adequate insurance coveragemay not be available at an acceptable cost, if at all, in the future and aproduct liability claim or product recall could materially and adversely affectour business.  Inability to obtainsufficient insurance coverage at an acceptable cost or otherwise to protectagainst potential product liability claims could prevent or inhibit thecommercialization of the products and diagnostic tests developed by ourcollaborators or us.  If we are sued forany injury allegedly caused by our products or our collaborators’ products, ourliability could exceed our total assets and our ability to pay the liability.

 

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*If we usehazardous materials in our business in a manner that causes injury or violateslaws, we may be liable for substantial damages.*

 

Our research and development processes involve the use of hazardousmaterials, including chemicals and radioactive and biological materials.  Our operations also produce hazardous wasteproducts.  The chemicals we use include,but are not limited to, flammable solvents such as methanol and ethanol;ethidium dye, which is a commonly used fluorescent dye for visualizing DNA;buffer solutions used in the purification of DNA; and various organic solvents,acids and bases.  We also use severalradioisotopes including phosphorous-32, carbon-14, sulfur-35, phosphorous-33,iodine-125 and hydrogen-3.  We cannot eliminatethe risk of accidental contamination or discharge and any resultant injury fromthese materials.  Federal, state andlocal laws and regulations govern the use, manufacture, storage, handling anddisposal of these materials.  We could besubject to civil damages and criminal penalties in the event of an improper orunauthorized release of, or exposure of individuals to, hazardousmaterials.  Further, it is possible thatthe materials we use could contaminate another party’s property.  In addition, claimants may sue us for injuryor contamination that results from our use or the use by third parties of thesematerials, and our liability may exceed our total assets and our ability to paythe liability.  In addition, compliancewith environmental laws and regulations is expensive, and current or futureenvironmental regulations may impair our research and development andproduction efforts.  Although we havegeneral liability insurance, these policies do not cover claims arising frompollution from chemical, radioactive or biological materials.  Our collaborators may also be working withvarious types of hazardous materials in connection with ourcollaborations.  In the event of alawsuit or investigation, we could be held responsible for any injury we or ourcollaborators cause to persons or property by exposure to, or release of, anyhazardous materials.

 

*Healthcarereform and restrictions on reimbursements may limit the financial returns fromour products and diagnostic tests.*

 

Our ability and that of our collaborators to commercialize therapeuticsand diagnostic products and tests may depend in part on the extent to whichgovernment health administration authorities, private health insurers and otherorganizations will pay the cost of these products and tests.  These third parties are increasinglychallenging both the need for and the price of new medical products, tests andservices.  Significant uncertainty existsas to the reimbursement status of newly approved therapeutics and diagnostics,and adequate third party reimbursement may not be available for any product toenable us to maintain price levels sufficient to realize an appropriate returnon our investment in research and product development.

 

# ***Risks Related to Our IntellectualProperty***

# * *

*Patent protectionin the biotechnology, pharmaceutical, and healthcare industries is uncertain,which may result in a decrease in the value of our products and technologies.*

 

We are involved in overlapping and rapidly evolving areas ofbiotechnology, pharmaceutical development, healthcare, and diagnostics andbasic research involving viral vectors, plant transgenics, proteomics,functional genomics, protein transformation, and immunotherapy.  Each of these areas has been the subject ofintense research and patenting activity throughout the world by our commercialcompetitors, actual and potential collaborators, academic institutions andgovernment researchers.  We cannotdetermine whether or not there are patents currently pending that, if issued,would prevent us from practicing our core technologies, commercializing them ordeveloping commercially viable products and diagnostic tests based upon them.

 

The patent positions of biotechnology firms generally are highlyuncertain and involve complex legal and factual questions that will determinewho has the right to develop a particular product.  Changes in, or different interpretations of,patent laws in the United States and other countries might allow others to useour discoveries or to develop and commercialize products and technologiessimilar to our products and technologies without any compensation to us.  Our potential collaborators or customers mayconclude that uncertainties about patent protection decrease the value of ourdatabases, products and services.

 

Throughout the world there are numerous issued patents, as well aspublished foreign patent applications which may be issued as patents, many ofwhich relate to our current operations, our anticipated future operations andthe products we are likely to develop. The scope of these patents is a matter of legal interpretation and issubject to uncertainty.  We have notobtained, but we may in the future obtain, opinions from our patent counselthat we have freedom to conduct our commercial activities free of claims ofpatent infringement from third parties. From time to time, we receive letters from third parties offering tonegotiate a license to LSBC based on a perception that our processes orproducts might infringe a patent owned by the third party.  Disagreements could arise from these letters,and could result in costly and time-consuming litigation and divert ourfinancial and managerial resources.  Inaddition, if we are ever determined to infringe the patent of any third party,we may be required to obtain a license to use this patent, which would increaseour cost of doing business.

 

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*Our patentapplications may not result in issued patents that are enforceable.*

 

Our disclosures in our patent applications may not be sufficient tomeet the statutory requirements for patentability in all cases.  As a result, we do not know which of ourpatent applications will result in enforceable patents.  Our patent applications may not be issued aspatents, and any patents that are issued to us may not provide commerciallymeaningful protection against competitors. Any issued patent may not provide us with competitive advantages.  Others may challenge our patents orindependently file patent applications that could result in an interferenceproceeding in the U.S. Patent and Trademark Office.  Others may be able to design around ourissued patents or develop products similar to our products.  In addition, others may discover uses forgenes or proteins other than those uses covered in our patents, and these otheruses may be separately patentable.

 

*Publicdisclosure and patents relating to our proprietary products, processes, anddiagnostic products and tests held by others may limit our proprietary rights.*

 

We are aware of issued patents and patent applications containingsubject matter such that we or our licensees or collaborators may require alicense or rights in order to research, develop or commercialize some of ourproducts, diagnostic tests and technologies. We may find that licenses relating to such subject matter will not beavailable on acceptable terms, or at all.

 

*Patentinfringement or enforcement litigation or interference proceedings could becostly and disrupt our business and may prevent us from commercializing ourproducts and diagnostic tests.*

 

The technology that we use to develop our products, diagnostic testsand key resources, and those that we incorporate into our products, diagnostictests and technologies, may be subject to claims by third parties, includingour collaborators, that they infringe the patents or proprietary rights ofothers.  Technologies of ourcollaborators may also be subject to infringement or similar claims which couldimpair our collaborative product and diagnostic test development andcommercialization efforts.  We also mayneed to enforce our patent rights in actions against others, which could beexpensive.  The risk of such eventsoccurring will tend to increase as the fields of generic drug, vaccine,diagnostic, health care and the biotechnology industry expand, more patents areissued and other companies engage in other generic drug, vaccine, diagnosticsand biotechnology-related businesses.

 

With respect to identifying proteins uniquely associated with diseasestates or as targets for drug therapy, we are aware that companies havepublished patent applications relating to nucleic acids encoding specificproteins.  We are also aware of issuedand pending patent applications covering certain aspects of bioinformatic-baseddiagnostic testing.  The issued patentsby the U.S. Patent and Trademark Office to these companies may limit ourability and the ability of our collaborators to practice under any patents thatmay be issued to us.  Also, even if theU.S. Patent and Trademark office issues us a patent, the scope of coverage orprotection afforded to the patent may be limited.

 

*We may notbe able to protect our trade secrets.*

 

We generally control the disclosure and use of our trade secrets usingconfidentiality agreements.  It ispossible, however, that:

 

•                  Some or allconfidentiality agreements will not be honored without our knowledge;

•                  Thirdparties will independently develop equivalent technology;

•                  Disputesmight arise with our consultants, collaborators or others concerning theownership of intellectual property; and/or

•                  Unauthorizeddisclosure of our know-how or trade secrets will occur without our knowledge.

 

###### **Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Information regardingour exposures to market risks is provided in Item 7A of our Annual Report on Form 10-Kfor the year ended December 31, 2004. There have been no material changes to our exposures to market risksince December 31, 2004.

 

###### **Item4.  Controls and Procedures**

 

(a) *Disclosure controls and procedures*.  Our Chief Executive Officer and ChiefFinancial Officer, after evaluating the effectiveness of our “disclosurecontrols and procedures” (as defined in the Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report on Form 10-Q,have concluded that as of the end of the period covered by this report, ourdisclosure controls and procedures were effective.

 

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(b) *Changes in internal control over financialreporting*.  There were nochanges in our internal control over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15that occurred during the third fiscal quarter that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

**PART II– OTHER INFORMATION**

 

###### **Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

On August 5, 2005, we entered into a three-yearprivate equity agreement that was amended and restated on October 12, 2005with Southridge Capital Management LLC’s advised fund, Brittany CapitalManagement Limited, which permits us to require Brittany Capital to purchase upto $15,000,000 of LSBC common stock.  Wehave a right to periodically put common shares to Brittany Capital for which itwill pay LSBC cash at a seven percent (7%) discount to the then market pricecalculated over a 10 trading day period. Each put transaction must have a minimum purchase price of $25,000 andthe number of shares issuable is limited to a maximum of five hundred percent(500%) of the weighted average volume for the twenty (20) trading daysimmediately preceding the put date, up to 4.99% of all of our outstandingcommon stock on a transaction closing date. The agreement commits LSBC to put shares having a minimum aggregatepurchase price of $2,000,000 and a maximum aggregate purchase price of$15,000,000 over the term of the agreement. A fee of up to $140,000 is owed to Brittany if the total put shares havea value of less than the minimum aggregate purchase price.  The maximum aggregate number of shares put toBrittany Capital may not exceed 19.99% of our currently outstanding commonstock, or approximately 6,430,000 shares, unless we seek and obtain stockholderapproval in accordance with rules and requirements of the NASD and theNasdaq Capital Market.  The agreementterminates at the earlier of Brittany Capital having purchased the maximumnumber of shares allowed; the Company’s common stock no longer lists on aprincipal stock market; or three years. The private equity agreement was issued in reliance on the exemptionfrom registration provided by Section 4(2) of the Act, on the basisthat its issuance did not involve a public offering, no underwriting fees orcommissions were paid by us in connection with such sale and Brittany CapitalManagement Limited is an “accredited investor,” as defined in the Act.

 

In connection with the secured promissory notes issuedon August 5, 2005, the Company issued common stock purchase warrants thatmay be exercised commencing on February 5, 2006 and which expire on February 5,2011. Mr. Ryan and Mr. Erwin, the Investors, may purchase up to462,963 and 154,321 shares, respectively, of the Company’s common stock at theexercise price of $0.81 per share, the closing bid price of the Company’scommon stock on August 4, 2005.  TheInvestors have the piggyback registration rights for the Company’s stock issuedto the Investors upon exercise of their warrants.  The warrants were issued under Section 4(2) ofthe Securities Act of 1933 in reliance upon the provisions of Regulation Dpromulgated thereunder and were made without general solicitation oradvertising.  The Investors areaccredited investors and have access to all relevant information to evaluatethe investment and represented to us that the shares were being acquired forinvestment.

 

In connection with theshort-term secured loan, or Loan, with Agility Capital, LLC, or Agility,effective on October 24, 2005, the Company issued a common stock purchasewarrant, or Warrant.  The Warrant givesAgility the right to purchase shares of our common stock numbering 500,000 on October 24,2005, 50,000 additional shares upon the second advance, 75,000 additionalshares upon the third advance, and 125,000 additional shares upon the fourthadvance under the Loan.  The Warrantexpires on December 31, 2015.  Thenumber of shares issued under this Warrant may increase by an amount in excessof 1% of Company’s outstanding fully diluted stock upon an event of defaultunder the Loan or failure to register the shares of common stock to be issuedunder the Warrant.  The Warrant’sexercise price is the lower of $0.68 or the average closing price of our commonstock for the thirty trading days prior to the exercise date.  The exercise price and the number of sharesexercisable will be adjusted if we sell, issue or grant additional shares ofour common stock or common stock equivalents at less than $0.68 per share.  Agility may elect to exercise the Warrantwithout cash consideration by reducing the number of shares received uponexercise.  The Warrant was issued under Section 4(2) ofthe Securities Act of 1933 in reliance upon the provisions of Regulation Dpromulgated thereunder and were made without general solicitation oradvertising.  Agility is an accreditedinvestor and has access to all relevant information to evaluate the investmentand represented to us that the shares were being acquired for investment.

 

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###### **Item 6.  Exhibits**

 

*List ofExhibits:*

 
| **Exhibit** | ** ** | **Exhibit**                                                                                                                                                              | ** ** | **Incorporated by Reference** | ** ** | **Filed** | ** ** |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------|------------|
| **Number**  | ** ** | **Description**                                                                                                                                                          | ** ** | **Form**                      | ** ** | **Date**  | ** ** | **Number** | ** ** | **Herewith** | ** ** |
| 4.1         |       | Amended and  Restated Rights Agreement dated June 29, 2005 between the Registrant and  American Stock Transfer and Trust Company                                    |       | 8-K                           |       | 07/6/05   |       | 4.1 |   |   |   |
| 4.2         |       | Private Equity  Credit Agreement and related exhibits dated August 5, 2005 between  Registrant and Brittany Capital Management Limited.                             |       | 8-K                           |       | 08/11/05  |       | 4.1 |   |   |   |
| 4.3         |       | Common Stock  Purchase Warrant dated August 5, 2005 to purchase 462,963 shares of  common stock, issued by the Registrant to Kevin J. Ryan.                         |       | 8-K                           |       | 08/11/05  |       | 4.2 |   |   |   |
| 4.4         |       | Common Stock  Purchase Warrant dated August 5, 2005 to purchase 154,321 shares of  common stock, issued by the Registrant to Robert Erwin.                          |       | 8-K                           |       | 08/11/05  |       | 4.3 |   |   |   |
| 10.1        |       | Secured  Promissory Note dated August 5, 2005 between Registrant and Kevin J.  Ryan.                                                                                |       | 8-K                           |       | 08/11/05  |       | 10.1 |   |   |   |
| 10.2        |       | Secured  Promissory Note dated August 5, 2005 between Registrant and Robert  Erwin.                                                                                 |       | 8-K                           |       | 08/11/05  |       | 10.2 |   |   |   |
| 10.3        |       | Note and Warrant  Purchase Agreement dated August 5, 2005 between Registrant and Kevin J.  Ryan and Robert Erwin.                                                   |       | 8-K                           |       | 08/11/05  |       | 10.3 |   |   |   |
| 10.4        |       | Security  Agreement dated August 5, 2005 between Registrant and Kevin J. Ryan and  Robert Erwin.                                                                    |       | 8-K                           |       | 08/11/05  |       | 10.4 |   |   |   |
| 31.1        |       | Certification of  the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |       |                          |       |      |       |   |   | X |   |
| 31.2        |       | Certification of  the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |       |                          |       |      |       |   |   | X |   |
| 32.1        |       | Certification of  the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   |       |                          |       |      |       |   |   | X |   |
| 32.2        |       | Certification of  the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   |       |                          |       |      |       |   |   | X |   |

 

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**SIGNATURE**

** **

**Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.**

 
| ** **                       | **Large Scale Biology Corporation** |
|----------------------------------|-------------------------------------|
| ** **                       | ** **                          |
| **Date: November 18, 2005** | **By:**                             | **/s/ Ronald J. Artale** | ** ** |
| ** **                       | ** **                          | **Ronald J. Artale** |
| ** **                       | ** **                          | **Senior Vice President, Chief Operating Officer** |
| ** **                       | ** **                          | **and Chief Financial Officer** |
| ** **                       | ** **                          | **(Principal Financial Officer)** |

 

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**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Exhibit Title or  Description**                                                                                                                                   |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of  the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2                |       | Certification of  the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1                |       | Certification of  the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   |
| 32.2                |       | Certification of  the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   |

 

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